What is Current Account Transaction? The current account, is one of the two primary components of the balance of payments The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored. A nation is said to have a trade deficit if it is importing more than it exports.

FEMA defines the term 'current account transaction' as a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes, Payments due in connection with –Foreign trade, –Other current business –Services, and –Short-term banking and credit facilities in the ordinary course of business; Payments due as –Interest on loans and –Net income from investments, Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with –Foreign travel, –Education and –Medical care of parents, spouse and children.

Schedule I - Transactions which are Prohibited Remittance out of lottery winnings. Remittance of income from racing/riding etc. or any other hobby. Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc. Payment of commission on exports made towards equity investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies. Remittance of dividend by any company to which the requirement of dividend balancing is applicable. Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea and tobacco. Payment related to "Call Back Services" of telephones. Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.

Schedule II - Transactions which require prior approval of the Central Government Purpose of RemittanceMinistry/Department of Govt. of India whose approval is required Cultural ToursMinistry of Human Resources Development, (Department of Education and Culture) Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding USD 10,000) by a State Government and its Public Sector Undertakings Ministry of Finance, (Department of Economic Affairs) Remittance of freight of vessel chartered by a PSU Ministry of Surface Transport, (Chartering Wing) Payment of import through ocean transport by a Govt. Department or a PSU on c.i.f. basis (i.e. other than f.o.b. and f.a.s. basis) Ministry of Surface Transport, (Chartering Wing)

Multi-modal transport operators making remittance to their agents abroad Registration Certificate from the Director General of Shipping Remittance of hiring charges of transponders by (a) TV Channels (b) Internet Service providers Ministry of Information and Broadcasting Ministry of Communication and Information Technology Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping Ministry of Surface Transport (Director General of Shipping) Remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump-sum payment exceeds USD 2 million Ministry of Commerce and Industry

Remittance of prize money/sponsorship of sports activity abroad by a person other than International / National / State Level sports bodies, if the amount involved exceeds USD 100,000 Ministry of Human Resources Development (Department of Youth Affairs and Sports) Remittance for membership of P& I Club Ministry of Finance, (Insurance Division)

Schedule III: Transactions which require prior approval of the RBI Release of exchange exceeding USD 10,000 or its equivalent in one calendar year, for one or more private visits to any country (except Nepal and Bhutan). Gift/ Donation remittance exceeding USD 5,000 per remitter/donor per annum. Exchange facilities exceeding USD 100,000 for persons going abroad for employment.

Exchange facilities for emigration exceeding USD 100,000 or amount prescribed by country of emigration. Remittance for maintenance of close relatives abroad, –exceeding net salary (after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in India and – (a) is a citizen of a foreign State other than Pakistan; or (b) is a citizen of India, who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign company. –exceeding USD 100,000 per year, per recipient, in all other cases.

Release of foreign exchange, exceeding USD 25,000 to a person, irrespective of period of stay, for business travel, or attending a conference or specialised training or for maintenance expenses of a patient going abroad for medical treatment or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/doctor abroad.

Release of exchange for studies abroad exceeding the estimate from the institution abroad or USD 100,000, per academic year, whichever is higher. Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeding USD 25,000 or 5% of the inward remittance whichever is more.

India’s Foreign Trade In the last five years, robust growth in merchandise exports. From US$ 63 billion in to US $ 185 billion in Share of global trade (WTO estimates): Merchandise trade0.83%1.45% Commercial Services exports 1.4%2.8% Goods & Services Trade 0.92%1.64%

India’s Foreign Trade Exports & Imports (Figures in US$ billion) YearExport Target Actual Export % Growth Imports% Growth (Revised) (April- Oct’09)*

India’s Foreign Trade Major Export Destinations Country ($ bn)% share in Total 1USA19.712% 2United Arab Emirates17.811% 3China8.55% 4Singapore7.65% 5Hong Kong6.44% 6United Kingdom6.24% 7Germany5.94% 8Netherlands5.94% 9Saudi Arabia4.83% 10Belgium4.33%

India’s Foreign Trade Major Import Commodities Commodity ($ bn) % share in Total 1Petroleum, Crude and products % 2Machinery, Electrical and non-electrical % 3Electronic goods % 4Gold and silver % 5Fertilizer, crude and manufactured % 6Pearls, precious and semi-precious % 7Organic and inorganic chemicals % 8Coal, coke and briquettes % 9Iron & Steel % 10Metaliferrous ores and metal scrap %

Indian Exports Period (US $ Billion) ( US $ Billion) Increase(+) / Decrease (-) April- Sept October November December January February March April’ 08 to March’ / Decrease (-) April May June July August September

Decline In Exports Impact on Indian exports: Suffered a decline in the last 11 months since October April - September 2009 exports show a decline of 28.5% (in $ terms) and 18.6% (in Rupee terms) vis-à- vis last year. Employment intensive sectors were severely affected.

Reasons For Export Decline Major Hurdles faced by Indian Exporters:  Unprecedented Rupee Appreciation by about 12% in the year ;  Global Economic Slowdown and Recession in Developed Economies during and its impact.  High Interest Rates  Non-availability of trade credit  Withdrawal of GSP Benefits by US on certain products such as Gems and Jewellery items, certain leather products etc.  Ban on exports of certain food products since  High Incentives provided by some of the countries like China, Bangladesh etc.

How to manage CAD? Action to reduce a substantial current account deficit usually involves increasing exports or decreasing imports. This is achieved by: import restrictions, quotas, or duties subsidizing exports influencing the exchange rate to make exports cheaper - primarily accomplished by devaluing the domestic currency adjusting government spending to favor domestic suppliers is also effective reduction in borrowing by the national government

Measures Taken by Govt. and RBI Measures taken by the Government: Interest subvention of 2% extended till , to labour intensive sectors for exports:- Textiles (including Handlooms), Handicrafts, Carpet, Leather, Gems & Jewellery, Marine Products and SMEs; Continuation of Duty Entitlement Passbook (DEPB) Scheme upto 31st December, 2010; Restoration of DEPB rates for all items where they were reduced in November, 2008 and increase in Duty Drawback rates on certain items effective from 1st September, 2008; DEPB and Freely transferable Incentive Schemes allowed without the initial requirement of BRC;

Stimulus package – Key features CENVAT reduced from 14 per cent to 8 per cent Service tax reduced from 12 percent to 10 per cent Additional Plan expenditure for critical rural & infrastructure schemes Monetary policy measures  Repo rate reduced from 9 percent to 4.75 per cent  Reverse repo rate reduced from 6 per cent to 3.25 percent  CRR reduced from 9 percent to 5 percent Large program for construction of affordable housing announced Accelerated depreciation of 50 percent for commercial vehicles

Back-up guarantee of Rs.350 crores made available to ECGC to provide guarantees for exports to difficult markets / products; Additional funds of Rs 350 crore provided to cover handicraft items etc. in Vishesh Krishi and Gram Udyog Yojana (VKGUY); Market Linked Focus Product Scheme extended for bicycle parts, Motor Cars and Motor Cycles, Apparels and Clothing accessories, Auto Components etc. Additional Rs 1100 crore provided to ensure full refund of claims of CST / Terminal Excise duty /Duty drawback. Additional funds of Rs 1400 crore provided for textile sector to clear the backlog claims of TUF; Export duty on iron ore fines eliminated, and for lumps, reduced to 5%; Some pending issues relating to Service Tax refund on exports resolved.

A Committee constituted under the Chairmanship of Finance Secretary to fast track resolution of procedural issues. Secretaries of Department of Revenue and Commerce other Members of the Committee;  Measures taken by RBI: Increase in Liquidity to the banks for improving credit flow by reduction of CRR from 9% to 5%, SLR reduced from 25% to 24%; Repo rate from 7.5% to 4.75% and Reverse Repo rate from 6% to 3.25%. Refinance facility to the EXIM Bank for Rs crores for providing pre-shipment and post-shipment credit. Increase in FOREX Liquidity Easing of Credit Terms by Enhancing the period of pre-shipment and post-shipment Rupee Export Credit by 90 days each, Increasing the time period of export realization for non-status holder exporters to 12 months etc.

Full Convertibility of the Indian Rupee? Convertible currencies are defined as currencies that are readily bought, sold, and converted without the need for permission from a central bank or government entity. The easy convertibility of currency is a relatively recent development and is in part attributable to the growth of the international trading markets and the FOREX markets in particular. Fully convertible currency – US Dollar Partially convertible currency – Indian Rupee Nonconvertible currency – Cuba and North Korea

RUPEE AS A CONVERTIBLE CURRENCY AND ITS IMPLICATIONS Advantages: More off shore funds investing in India Easy imports and abroad investing for Indians Disadvantages Competition against foreign suppliers Massive diversion of funds from investments in the home economy of India to investments abroad. Rupee will be under the control of currency speculators.

Promotional Measures/ Incentive Schemes Vishesh Krishi and Gram Udyog Yojana (VKGUY) Focus Market Scheme (FMS) Focus Product Scheme (FPS) Market Linked Focus Product Scheme (MLFPS) Served From India Scheme (SFIS)

Vishesh Krishi & Gram Udyog Yojana (VKGUY) To promote exports of : (i) Agricultural Produce and their value added products; (ii) Minor Forest Produce and their value added variants; (iii) Gram Udyog Products; (iv) Forest Based Products; and (v) Other Products, as notified from time to time. VKGUY benefits are granted with an aim to compensate high transport costs, and to offset other disadvantages Duty credit scrips issued under VKGUY Rs.2676 crores

Focus Market Scheme Objective is to offset high freight cost and other externalities to select international markets with a view to diversify the markets and to enhance India’s export competitiveness in these countries. Currently 109 markets have been notified; Duty credit scrips issued under FMSRs.347 crores

Focus Product Scheme Objective is to incentivise export of such products which have high export intensity / employment potential, so as to offset infrastructure inefficiencies and other associated costs involved in marketing of these products. Exports of notified products to all countries entitled for Duty Credit scrip equivalent to 2 % of FOB value of exports. Currently over 1000 Products (at 8 digit level) covered under FPS Duty credit scrips issued under FPS Rs 215 crores.

Market Linked Focus Product Scheme (MLFPS) To promote exports of products of high export intensity but which have a low penetration in countries; Export of Products/Sectors of high export intensity / employment potential (which are not covered under present FPS List) would be incentivized at 2 % of FOB value of exports. Currently over 1550 products covered under MLFPS.

Served From India Scheme (SFIS) To accelerate growth in export of Services to create a powerful and unique “Served from India” Brand; All service providers (except a few ineligible sectors / services) entitled to duty credit scrips equivalent to 10 % of free foreign exchange earned during the year; – 785 SFIS scrips issued for duty credit worth Rs.736 crores.

Reason for FII inflows in India Lower interest rate of Fixed Deposits in foreign countries –USA: 0.5% to 2.75% (Based on ease of access) {1.3% for 1 year} –UK: 1% to 4.5% (for 1 year) –Canada: 1% to 1.55% (for 1 year) Lower Lending rate in foreign countries –Canada: 6% to 10% (based on secured or unsecured) –USA: 8.55% to 10% –UK: 7.5% to 10% Recovering economics from recession Lower tax rates Easy repatriation of profits

Higher returns from Indian Markets Month and YearSensex Closing% returns (yearly) Nov Nov Nov Nov Nov Nov Nov Nov Nov

Impact of Inflows on Rupee Valuation Conventional wisdom says that the day-to-day fluctuations in the rupee would be driven more by the capital inflows. The main factor driving the exchange rate has been the strength of the dollar. The dollar has depreciated against the euro for some time on account of the high deficit on both the current account and fiscal fronts, which combined is 14.3% of GDP. Fund movements have been quite idiosyncratic — swinging between stocks, commodities and bonds across markets looking for better returns.

Rupee has climbed about 5.6 percent since the beginning of September due to sustained capital inflows. The fund inflows from Foreign Institutional Investors (FIIs), for the calendar year so far, have topped a record $24 billion and the rupee is up 4.4 percent. The sharp pick-up in daily inflows has largely been due to the impressive IPO pipeline. This suggests that a slowdown may be in the offing once the major IPOs are completed and the focus shifts to the impending monetary policy meetings of the Reserve Bank of India (RBI) and the US Fed.

Annualised daily volatility for the dollar relative to the euro and rupee relative to the dollar since January. 2010$/Euro$/Rs. January February March April May

It can be noted since September a whopping USD 11.7 billion foreign fund flew into the domestic stocks, and since the beginning of this year, the FIIs have pumped in a record USD 25 billion into the country on the back of dirt cheap interest rates in their home markets and the continuing high return from emerging markets like India.

I n this context, it is interesting to see as to what has driven the rupee: the exogenous euro-dollar relation or the endogenous factor of FII inflows. the coefficient of correlation between changes in the rupee-dollar rate and FII inflows was insignificant at while that with the euro-dollar rate was better at (-)0.33. (Negative sign means that as the dollar strengthens, the rupee weakens). Curiously even in the month of May, when the rates were most volatile, the coefficient of correlation was with the euro-dollar and for the FII/rupee-dollar relation. In fact, the latter shows that when there are more FII flows, the rupee depreciates i.e. has a higher value. Evidently the exogenous global conditions have a greater bearing on the rupee-dollar rates. Also a regression analysis for changes in exchange rate on FII levels and dollar-euro rate shows that the former is not significant, meaning thereby that the rupee-dollar rate was not really affected by the FII levels. Global conditions have definitely been more critical here.

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